Except in the case of documents with numbered
paragraphs, when it is obvious from the numbering that material has been
omitted, diamonds (♦) are used to indicate the omission of one or
more paragraphs.

Chapter XIII:

Soldiers Battle With Economies

Although some of the emergencies of civilian life were overcome, the Italian
economy was a serious problem throughout the occupation. In the first of the
two stages which marked Allied efforts to cope with what can only be called the near breakdown of the Italian economy, civil affairs authority faced, in
addition to the problems inherent in the initial war devastation, the
difficulties arising from the limitations of early military policy. The U.S.
Army had accepted these limitations-and persuaded the British to accept them
also-in the planning period when, expecting to turn over civil affairs
relatively soon to civilian agencies, they had felt justified in confining
themselves to relief and very simple rehabilitation. Accordingly the Army
restricted its supply program to food, medical and sanitary items, and other classes of supplies necessary to prevent disease and unrest from
interfering with military operations. Seriously needed supplies in other
categories, it was presumed, would be obtained by civilian agencies, though as
matters developed, it was difficult or impossible for such agencies to secure from supply and shipping authorities allocations over and
above those certified as militarily necessary. Thus, illogical as it may seem,
it was easier for AFHQ to get thousands of tons of wheat than for it to obtain
agricultural or industrial machinery occupying less cargo space and designed to
reduce the need for imports by increasing local production.

Rehabilitation in the sense of reconstruction was to be reserved for
civilian agencies; certainly, however, the military authorities were expected
to rehabilitate the economy of the occupied country to the extent necessary to
prevent civilian upheaval from interfering with military operations. What was
not foreseen was the degree to which, in Italy, war damage alone would bring the
Italian economy to the brink of disaster. Even a minimum rehabilitation program
presented a problem of staggering proportions. Allied bombings and the far more
destructive German demolitions had reduced the Italian economy to a shambles.
Industrial plants had been destroyed or damaged; transport and communications
systems had been disrupted; agricultural machinery and farm animals had largely
been seized by the retreating armies. Moreover, in their efforts to make the country as
useless as possible as a base of operations the Germans had laid their knives
at the jugular vein of the Italian economy: the hydroelectric system on which,
since Italy is lacking in coal, 90 percent of the industrial system depended. Earlier efforts at recovery had to be made amidst
active military operations, which compelled the Allied forces to hang on to such
supplies, transportation, and machinery as were available, as well as the
relatively few large industrial buildings that remained intact. The physical
devastation, bad as it was, was not as bad as the evils that came in its

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wake. Invasion, only the last in a train of misfortunes, led to a general
shortage of basic commodities, serious inflation, and a shakiness in the
financial position both of private banking and of the government.

The situation in Italy was far worse than the drafters of military government
economic doctrine could have foreseen when they enjoined GAO's "to revive
economic life" and so "to develop the area as a source of supply for future
operations." The question was not whether Italy could aid the Allies in the
future but whether, within the limits of the supply program, the Allies could
aid Italy sufficiently to make it usable for present military operations. In
theory a re-examination of the entire concept of military necessity could have
been demanded at this point to determine whether this concept could not
validly be broadened instead of being defined in terms of fixed supply
categories. But initially the Army was still trustful that the civilian agencies
could, as planned, soon take over and meanwhile step into any serious breach. In
the earlier stage, and until experience showed that this inveterate assumption
was not valid, military authorities concentrated upon economic rehabilitation
within the limits of existent policy, while at the same time attempting to
provide such rehabilitation materials as were needed by the few plants capable
of producing for the war effort.

Economic and financial experts in uniform were on hand who, while convinced
at the outset that the measures available were chiefly palliatives, still hoped
that palliatives might be sufficient for the time being. In some spheres,
especially those where the expedient of Allied military lire could be employed,
initial Allied measures did some temporary good. As a first step the banks were
reopened a few weeks after the invasion of the mainland and unlimited
withdrawals were permitted. Within a short time deposits were exceeding withdrawals and a complete financial breakdown was prevented. However, it was
necessary at first for the Allied authorities to give aid to the government, not
only in printing military lire but in lending them as well. The general policy
was that the currency needs of the government should be met through the banks.
In November 1943, however, an emergency arose whereby the Italian
government had to pay off a maturing issue of government bonds. It was essential
that this obligation be met if the credit of the government was to be
maintained. With permission from CCAC, funds up to 300,000,000 lire were made
available to the Treasury and the Bank of Italy. Thereafter, emergency
arrangements were made for the Bank of Italy to assume responsibility for
financing governmental needs, and direct advances by the Allied Military
Financial Agency (AMFA) to provincial and local agencies were no longer needed.
But distrust in the currency could not be suppressed and to the Allied
Commission (AC), at least, there seemed justification in the government's plea
that it needed financial assistance to offset the huge national deficit created
by Allied expenditures in military lire for which Italy would have to pay the
piper in the end. Later, in 1944 and again in 1947, the government was granted dollar equivalents for Allied lire expenditures
in Italy. The extension of substantially less aid earlier in the occupation
would have been more useful. But Allied public opinion was then indicated by the
financial officer who wryly commented that Italians demanding financial help
should be advised of the taxes in England.

The basic economic problem was control of inflation. The roots of the evil
went back to the Fascist regime, which had spent lavishly to finance Mussolini's
military exploits. The already weakened system of price and rationing controls
collapsed with the invasion and, though the Allies con-

[341]

tinued all of them, the system could never be rebuilt. Nor did the reduction
of controls to a few basic foods work much better. The inflationary spiral
continued, wage increases were allowed and then disallowed, and farmers
preferred to hoard wheat rather than sell at official prices. As the problem
mounted, the FEA toward the end of 1943 dispatched a special mission headed by
Adlai Stevenson to investigate. This group laid the principal blame on the
expenditure of A.M. lire by Allied troops and also criticized by implication the
rate of exchange of 100 lire to the dollar on the ground that it undervalued the
lira. The FEA experts were skeptical of current theater hopes of successfully
applying selective price controls and subsidies. Soon ACC itself became
skeptical-just when the CCS, concerned over the mounting theater calls for wheat
imports despite shipping stringencies, cabled AFHQ suggesting an attempt to
defeat the black market by still more drastic measures. The Supply Subcommittee
of the CCS added a second group of visiting experts to the theater at the same
time that ACC was just setting up still a third group-an Anti Inflation
Committee consisting of representatives of the U.S. and U.K. Treasuries as well
as of some financial specialists already in the theater.

All three committees made useful suggestions although perhaps their chief
usefulness lay in convincing higher authorities (in Washington and London) that
not too much more could be done than was already being done. Some authorities
in the theater, such as, for example, the vice-president of an ACC Section who
believed that the worst ills could be overcome if the government were required
to pay larger sums to Italians on relief, also seemed in need of an education in
economics. But by and large, theater officials, professional soldiers as well as
former civilians, were learning something of economics through hard experience. They were not surprised, therefore, when the Allied
Anti-Inflation Committee reported that just as inflation had no single cause so
there was no simple remedy. Both this committee and the Combined Supply Group,
however, emphasized the need for a limited program of imports, not only to
relieve severe shortages but also to help restore production, especially
agricultural, and to counter inflationary tendencies. The difficulty with this
suggestion lay not only in the continuing shipping shortage but even more since
the type of imports recommended would not take too much cargo space-in the
severe limitations on the Army supply program in respect to rehabilitation
supplies. The latter difficulty would be overcome if, now that the 6-month
period of military responsibility for civilian supply had ended, responsibility
could be taken over as planned by civilian agencies which would have greater
latitude in importing rehabilitation supplies. In February and March the
Assistant Secretary of War negotiated on this question with both FEA and the
State Department, and though these negotiations failed, the Secretary of War
returned to the issue again in June in a letter addressed to the Secretary of
State. The civilian agencies wished the War Department to continue its supply
responsibility because they were now hopeful that before too long UNRRA could
assume the burden-a hope the materialization of which was delayed again and
again due to unforeseen difficulties.

Under the circumstances AFHQ and ACC could only continue to put their chief
efforts into measures other than basic rehabilitation. As the visiting experts
had advised, but as the theater would probably have done of its own accord, ACC
intensified its attempts to increase Italian production. The measures included
preparations for an all-out amassment program for the new crops, and the aid
of the

[342]

Italian Prime Minister and even of the Vatican itself was enlisted for the
attendant propaganda effort. In addition, as the Combined Supply Group had
advised, ACC waged a campaign to reduce the number of ration cards by ferreting
out the large number of illegal cardholders. Still further, it tried to get a
greater proportion of local resources for civilian needs by reducing
unnecessary military pre-emption. It did so chiefly by bringing the issue to the
attention of the Supreme Allied Commander, Mediterranean Theater (SACMED) and
gaining his support in a reorganization of the military Local Resources Board
designed to give ACC greater representation. SACMED also gave signal aid by
announcing, avowedly to reduce inflation and effect dehoarding of grain, an
increase of the bread ration in Southern Italy to 300 grams. Finally, now being
supported in this move by the visiting economists and supply experts, ACC
requisitioned agricultural rehabilitation supplies, such as fertilizers, and at
the same time requisitioned clothing and raw materials to stimulate local
production.

Most of the supply requests had to be rejected by Washington because of
shipping and supply stringency. Despite advice from the CCS that he would have
to meet the increase in the bread ration entirely from local production, SACMED
let the increase go into effect as the psychological effect of its announcement
had already proved beneficial. The requisition for wearing apparel elicited in
July an inquiry as to the basis on which it was justified; AFHQ tried to make
out the best possible case on the ground of minimum civilian needs; the CCAC
then asked directly whether. the requisition could be justified by military
necessity; and AFHQ in its reply of 13 September, felt that it could not in good
conscience answer in the affirmative. This, as AFHQ probably fore saw and as it was advised on 27 October, doomed the requisition within the
framework of the military supply program.

On 15 September, two days after being asked whether civilian clothing was a
military necessity, General Wilson addressed to the CCS a rather extraordinary
communication, which is reproduced at the end of this chapter and which brings
the first phase of rehabilitation efforts to its climax if not its conclusion.
His motives may have included irritation over the wearing-apparel
correspondence, a sense of injustice at Washington's criticism of the theater's
efforts, a belief that reasoning could still produce some immediate good, and a
judgment that even if it did not, the present unsatisfactory situation should be
set forth in the record. Whatever the underlying motives which prompted it, the
letter is marked by a tone which at least shows the exasperation of the sender.
This did not preclude humor, as General Wilson referred to the case in which a
requisition of paper for keeping Italy's tax records had evoked the inquiry as
to whether it could be justified by military necessity. Instead of attacking
the narrow interpretation of military necessity (which the British had never liked from the beginning) General Wilson
took the still more radical course of suggesting that a broader criterion than
military necessity now seemed to be called for if the Allies, in concentrating
upon the current military aims, were not to be defeated in their ultimate
objective of a reasonably prosperous and contented postwar Italy. He asked
whether the directives on civilian supply and economic assistance could not be reconsidered, and he requested that, if it was now Allied policy to assist
Italy beyond the point required by military necessity, he be informed of the
extent and type of industrial rehabilitation desired, the extent to which, if at all, he
might take

[343]

inflation into account, and the degree to which he could take measures for
encouraging exports.

As he must have known even before the CCS so informed him, General Wilson had
raised a question calling for political decision. Already the President and the
Prime Minister had been driven by various forces and considerations to ponder
this question, and in less than two weeks after SACMED's letter they announced
jointly a new policy toward Italy. Its economic and supply implications
conformed to SACMED's suggestions, and the subsequent history of Allied
assistance to Italy revolves about the efforts to implement the new
dispensation. (See Chapter XVII.)

TWO GOALS-REVIVAL AND USE OF LOCAL ECONOMY
[U.S. Army and Navy Manual of Military Government and Civil Affairs, Dec 43]

k. Economics. The basic economic policy of United States military government
is two fold: first, to revive economic life and stimulate production in order to
reduce to a minimum the needs of the area for United States and allied
assistance and to develop the area as a source of supply for further operations,
and second, to use available goods and services as efficiently as possible for
the satisfaction of military and civilian needs. ♦ ♦ ♦

3.... loans will be restricted to the minimum necessary for achieving their
purpose. They will be made only in cases where they will assist in the
restoration of order and rehabilitation of essential activities and are
desirable from the point of view of the military effort and where local banks
are not in a position to provide such financial assistance. AMFA is not intended
to function as a competing agency to existing commercial banks. AMGOT officers
should use every opportunity to discourage any impression (which will be only
too likely to arise) that AMFA is to be regarded as an unlimited source of funds
for all and sundry. ♦ ♦ ♦

7. . . . Shipping space to import food must be avoided; food must at all
costs, be secured locally if possible. It is most important that agriculture and
fishing (subject to Naval approval) should be resumed and that everything should
be done to assist the farming population to carry on with their work. ♦ ♦ ♦

♦ ♦ ♦ I have
no doubt we can do the job with a little adjustment, but I do think that so far
as Army responsibility for relief is concerned it should be confined to
subsistence levels. We may have to undertake rehabilitation for our own purposes
as we are already doing in Sicily, but so far we have tied it down to that and I
think rightly. We have already distributed some seeds in Sicily but we balked at
a very large farm tractor program for Italy generally that Governor Lehman
wanted us to get started on.
1♦ ♦ ♦

♦ ♦ ♦ Goods for civilian consumption have never been provided to Italians on
a charity or relief basis. It has been assumed even from the beginning that the
Italians would pay. At the outset . . . AMG was directed to sell goods imported
for civilian consumption at the highest prevailing legal price. This they did,
collecting lire from civilian wholesalers. ♦ ♦ ♦

AFTER SIX MONTHS CIVILIANS ARE ASKED TO TAKE OVER RELIEF BUT DECLINE
[Min of Mtg in McCloy's Office With Asst Secy of State Acheson, and Others,
23 Mar 44, ASF, ID, Hist of Civ Sup, DS-194]

♦ ♦ ♦ Mr. McCloy asked Mr. Acheson when the FEA and UNRRA would have money to
relieve the Army of its relief responsibility. Mr. Acheson outlined the UNRRA
problems and stated that in his judgment the Army should look to the greater
part of 1944 with Italy as a supply responsibility. General Richards stated that
this was very hard to justify. In reply Mr. Acheson stated his justification for
the Army's continuing was that Italy had become a responsibility of the U.S.
Government by virtue of our military operations and that for this reason the
U.S. Government could not divest itself of the responsibility. He stated that
the FEA and the Army were the only available agencies of this Government and
that the FEA was in no better position than the Army since the FEA has always
maintained that it is merely an adjunct of the military and an agent of the Army
for certain procurement functions. Therefore, he added, if the Army did not feel
it could use its funds, FEA could not do so. . . . In conclusion, he stated that
he was arguing to get the Army to broaden its views on the relief problem so
that it would retain relief responsibility in all areas until UNRRA or some
other international relief agency could take over the job. ♦ ♦ ♦

Mr. McCloy stated that the Army was in good shape as long as it stuck to the
wake of battle theory and that it was impolitic for the Army to be engaged in
the relief business as such. He added that there is a point when Congress will
very well ask what the Army is doing in Sicily. ♦ ♦ ♦

ARMY AGREES TO WAIT UNTIL UNRRA AND FEA TAKE OVER
[Memo, Clay, Dir of Materiel, ASF, 5 Apr 44, on Conf With Civilian Agencies
in the Office of McCloy, ID files, Basic Policy: Italy]

1. At a conference held in the Office of the Assistant Secretary of War, Mr.
McCloy, on 4 April 1944, attended by representatives of the Bureau of the
Budget, Foreign Economic Administration, State Department, and War Department,
the following agreement was reached with respect to the submission of estimates
to Congress for appropriations for civilian relief in occupied and liberated
areas.

a. The War Department will present the estimates for the basic essentials
for Western Europe for a period of six months, justifying these estimates on
the basis of military necessity in connection with planned operations. This
will involve increasing present budget estimates by adding thereto the funds
which were to be requested by FEA for clothing, agricultural seeds and
fertilizer, farm machinery, and sundries.
b. The War Department will continue its present provision of supplies for
southern Italy and Sardinia until UNRRA is prepared to take over with October
1944 set as the objective date. It is presumed that military necessity will
justify this continuance of operation. However, no additional funds will be
requested for this purpose.
c. The War Department will continue its present provision of supplies for
Sicily. However, the Foreign Economic Administration will develop ways and means
to assume the responsibility for this area at the earliest feasible date, if
possible, by 1 July.
2♦ ♦ ♦

1.... Ever since 1930 Italian budgets had consistently shown heavy deficits,
. resulting from Italy's self-sufficiency campaign, the Abyssinian and Spanish
adventures, and the administrative burden of the corporative state. Italy's
additional war expenditures were 6o billion lire in 1940-41, and 80 inflationary borrowing
methods. Thus the inadequate taxation program of the Italian government,
declining revenues from existing taxes, the greatly increased currency
circulation, the shortage of consumer goods and the surplus purchasing power
consequent upon these factors, produced a heavy upward pressure upon prices
which the government made numerous unsuccessful attempts to relieve. The
deterioration of the wartime financial situation was obvious to the Italian
people and the inflationary trend was thereby aggravated.

2. With this background in mind, the Finance Division of AMGOT Headquarters
in Palermo created, as soon as the required personnel was available, the Finance
Intelligence Office for the purpose of collating information on the
inflationary picture and suggesting measures for dealing with it. ♦ ♦ ♦

6. At mid-August the available price data permitted the construction of an
index only for Palermo. An index of twelve foodstuffs showed that black market
prices were10000% of Italian official prices and 489% (unweighted) of AMGOT
prices using 1940 as a base.♦ ♦ ♦

BY OCTOBER CERTAIN BASIC FOODS AVAILABLE ONLY ON BLACK MARKET
[ AMGOT Hq, Study of Cost of Living Among Palermo Relief Families, 11Oct 43,
ACC files, 10000/100/1040]

The main diet of the poorer people in Palermo has regularly been bread,
pasta, olive oil, beans and such green vegetables as are in season. Directly
prior to the occupation, bread, pasta, olive oil, and horse beans were all available in the rationed amounts on the
regulated market at the specified government prices. Fresh vegetables were not
rationed and were obtainable.

Since the occupation, pasta, olive oil and horse beans are not obtainable on
the regulated market and can be secured only in the Black Market. A comparison
of the difference in the prices is as follows:

Pasta. Regulated Price

4.20 lire a kilo
(Unobtainable
except in Black
Market.)

Black Market Price

50.00 lire a kilo

Percent of difference of Black Market price over
Regulated

1090 p.c.

Olive Oil. Regulated Price

22.00 litre a litre
(Unobtainable
except in Black
Market.)

Black Market Price

120.00 lire a litre

Percent of difference of Black Market price over
Regulated

445%

Horse Beans. Regulated
Price

7.00 lire a kilo

Black Market Price

20.00 lire a kilo

Percent of difference of Black Market price over
Regulated

186%

Bread is obtainable now on the regulated market regularly in the full daily
ration amounts only if the family representative is always fortunate enough to
be approximately in the front 2/3 of the bread line, which is not very likely.
The people in the rear of the line get none, because there is insufficient
quantities of bread in the stores. Our investigation showed that the families
interviewed generally obtain bread only three days a week instead of seven.
Therefore, they can thus secure only 7 of the rations allowance of 150 grammes
per day. To obtain the remainder they must resort to the black market at what
are to them prohibitive prices. The black market price of bread is eight times
the regulated price.

Many women with numerous children, being widows or wives with husbands absent
from home find it difficult to stand long periods in the bread lines, since they
have nowhere to leave their children. Yet if they do not stand in line, they do
not get any bread at a price they can afford.

Green vegetables are not rationed and are freely obtainable in season, but
the price has increased since the occupation by about 2000%. Because there is
little variety on the market at any single season the people cannot eat
vegetables to the exclusion of all other foods.♦ ♦ ♦

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Prior to the occupation, the relief granted was barely sufficient to live on.
Now with the greatly increased cost of living and the unobtainability of most
kinds of staple food within their economic reach, the condition of people in
Palermo on relief appears to be somewhat less satisfactory than before the
occupation. ♦ ♦ ♦

A series of processions and strikes in Palermo against alleged insufficiency
of wages and high price of foods caused disorderly demonstration outside
Municipio and Prefettura on 19 October. Italian troops fired on demonstrators
and killed 14 persons. There were no Allied casualties. British troops are being
confined to barracks and leave of U.S. personnel has been cancelled. ♦ ♦ ♦

A PROGRAM Is DRAWN UP FOR CONTROL OF INFLATION
[Finance Div, AMGOT Hq, Rpt, May-Nov 43]

7. Upon instructions from the Economic and Financial Council on 13 September,
the Intelligence Officer of the Financial Division prepared a comprehensive
plan for inflation control.... The chief recommendations in this report were:

(a) Tax revenue should be increased and the existing system reviewed.
(b) Savings channels should be restored.
(c) Pressure for wage increases should be resisted.
(d) Appeals continued to troops to use discretion in local spending.
(e) Energetic enforcement of all price and rationing orders.
(f) Systematic supervision of distribution channels, notably wheat and olive oil.
(g) Importation of certain basic commodities.
(h) Construction of a price
index to measure cost of living. ♦ ♦ ♦

15 (a) By Proclamation No. 8 prices of foodstuffs and goods officially in
force before D Day were to remain at the pre-occupation rates, except for
commodities subject to seasonal or regional variation for which SCAO's were to
fix fair prices based on those normally current. Many factors made this
difficult to enforce, however: the natural tendency of the Italian to "sting" a
foreigner, especially the supposedly wealthy Anglo-Saxon race; the knowledge
that the lira had been devalued, leading to attempts to increase prices by an
equivalent amount; the flourishing black market; the tendency of the soldier to
pay any price asked and often not to bother about the change; the shortage of
stocks and consequent desire to realise on those that there were, etc. There was
no organized attempt to control prices of other goods at first, with the natural
result that where these goods existed, prices rose alarmingly and daily.
Vigorous measures were taken with the co-operation of the military authorities
in Syracuse, where prices were soon under control and several shopkeepers in
prison; but in Palermo the evil was never tackled, and was still rampant at the
end of October. General Orders 4 and 5 were published in September; it was,
however, much harder to arrest rising prices than it would have been to prevent
them from rising at all.

(b) General Order No. 4 .fixed prices for goods and services generally at the pre-occupation level, and required all items
displayed for sale to be plainly marked with its price; lists of these prices
were to be sent to CAO's. This order, with the co-operation of the purchasers,
could have been enforced as regards the markings of prices; it was not so easy,
however, to decide whether those prices were in fact the pre-occupation prices.
CAO's had no time to check them, and often

[347]

in fact no data against which they could be checked; while in Palermo, if
every offender against the order were prosecuted, every trader and hawker in the
city would have been in the courts. With General Order No. 4 a list was issued
to SCAO's giving overall maximum prices within which they were to set prices in
their ,provinces.

(c) General Order No. 5 called for a declaration of stocks over a specified
minimum of grain, oil, sugar, vehicles, tires, fuel, building materials, etc.,
and trafficking in the commodities specified in the order was forbidden.
Declarations had to be made to CAO's by 15 October, so that it was not possible
to consider the results at Headquarters by the end of the month; it was pointed
out by all SCAO's, however, that they had neither the staff nor the time to
examine these declarations in any detail. ♦ ♦ ♦

3. After inquiry, consultation, discussion and considerable reflection, one
is forced to the conclusion that AMGOT is not likely to be more successful in
effecting control than was the former administration....

5. It is submitted that a control of the whole range of agricultural products
is doomed to failure and that it may be possible to control reasonably
effectively a limited number of products....

6. The only practical method of ensuring an equitable distribution of commodities in short supply is by rationing. It is,
however, suggested that the list of rationed agricultural products and
derivatives be strictly limited to absolutely essential articles of
consumption. The list for the present should be confined to bread, flour, pasta,
olive oil, and sugar. The maximum ration for each commodity for each province,
depending on the supply position, should be advised confidentially to each S.C.A.O. who should be permitted to fix a ration within those limits which he
feels could be honoured. The ration would be subject to periodical revision
according to the supply position.
3

THE REMEDY IS KNOWN BUT CANNOT BE APPLIED
[Civ Sup and Resources Div, AMGOT, 15th AGp, Rpt, Jul-Oct 43]

15. d. A memorandum on inflation prepared by the Financial Division declared
that the way to combat the Black Market was to introduce adequate food and
consumer goods into normal trade channels; it was unfortunate that, for reasons
given earlier in this report, this measure could not be taken, though there was
full agreement with the theory.

(96) On 20 November 1943 General Order No. 14 granting a temporary wage
adjustment was published, granting salary increases to governmental employees
in accordance with a stipulation schedule and permitting private employers to
make increases in accordance with the same schedule.

(97) During the month considerable labor unrest was evident, traceable to
two causes: (a) Lack of adequate' supply of food at reasonable prices; (b) Wages
insufficient to maintain a minimum standard of living....

(98) An example of the kind of situation that arose is that of the Societa Generale Elettrica della Sicilia.
On 8 November, 650 employees of the Societa Generale Elettrica della Sicilia in Palermo left work to search for flour
substitutes,

[348]

leaving 50 essential workers at the plant. At the conference that day, the
workers insisted their action was not a "strike" but a human and necessary
attempt to obtain food for their families. At the same time increased wages were
demanded. The workers returned to work when it was explained that efforts were
being made to make food available and that a wage increase was under immediate
consideration. .. .

(99) The issuance of General Order No. 14 undoubtedly reduced the demand for
higher wages; however, the wage increases did not compensate for the actual
increases in the cost of living. The scarcity of food, the increasing black
market, and the rising cost of living continued to contribute to labor unrest at
the end of the period under review.
4♦ ♦ ♦

THE INCREASE IN WAGES IS PARALLELED BY RISE IN LIVING COSTS
[Hq AMG, Rpt for Dec 43]

(75) In December increases in wages and salaries for public employees were
authorized in Regions I and II, and authority was given for the adjustment of
wages between private employers and employees. The order was naturally well
received by private employees, but . . . the effect it had in helping them has
been nullified by the rapid increase in prices. Prices have risen sharply,
particularly in Region II in the provinces bordering on Apulia and Campania.
This was caused in part by foraging parties entering the Region, with or without
permits, to buy foodstuffs. Lack of personnel made effective control of these
actions practically impossible, especially with respect to those operating under
the cloak of military authority, against whom civilian police could not be
expected to take any action. Some illustrations of the extent to which prices
have risen in Region II, largely as a result of such foraging parties, may be
cited. On the coastal road south of Taranto fowl which previously sold at 25 to
35 lire now bring 150 to 200, while turkeys previously sold at 150 to 200 lire
now sell for 800 to 1200. Eggs which were in ample supply at 3 to 4 lire early
in October, are now practically unobtainable at 14 to 15 lire. Preliminary
reports on a black market grain case indicate that several tons of wheat were
sold originally for 1600 lire per quintal and resold for 2300. ♦ ♦ ♦

1. Control of inflation in areas under A.M.G. (or A.C.C.) is one of the major
requirements of A.M.G. Under this policy substantial additional wage increases
cannot be granted, for such increases would be powerful inflationary forces.
Officers are requested and instructed, therefore, to be extremely careful when
wage questions are being considered to do or say nothing contrary or prejudicial
to the A.M.G.'s efforts to control inflation.

2. Officers should understand that substantial additional wage increases
leading to inflation are more harmful in the long run to the people than are the
results of the present wage scale. The quantities of goods available in the area
under A.M.G. control is limited to the amount on hand, plus the amount which can
be produced in the area, plus the amount which can be imported. Because of war
conditions payment of higher wages, with the consequent higher prices, will not
alleviate the supply situation by increasing significantly the amounts of goods
produced or imported. However, by furnishing added impetus to the inflationary
tendencies the higher wages and higher prices will do positive harm. Inflation
disrupts the civilian economy and creates civil unrest, thus reducing the amount
of goods produced and available for consumption. The lot of the civilian is made
worse and progress of the Allied armies is hindered because more men and more
resources must be diverted to uses behind the combat lines. ♦ ♦ ♦

5. I had a meeting yesterday evening with Badoglio and the Ministers for
Finance, Agriculture and Interior. They pressed me very hard indeed on the
subject of raising salaries and wages

[349]

in Italy, particularly those of civil servants and Government officials. They
painted a most gloomy picture and stated very definitely that they would be
unable to prevent serious disorders if something were not done rapidly to
alleviate the situation. . . .

6. I informed them that as they already knew, I was doing all I could to
secure an increase in the bread ration and that this was an obviously better way
of dealing with the situation rather than an increase in wages which could under
existing conditions be nothing but a vicious palliative. They agreed
unreservedly, but stressed the importance of being able to announce any increase
in the ration at the earliest possible moment. Failing this it would be
absolutely necessary to do something about wages. ♦ ♦ ♦

5. The inflationary pressures are being held in check with the greatest
difficulty. The primary control is the pegging of wages, which in turn depends
on the purchasing power of current wages, in terms of a minimum subsistence
ration. ♦ ♦ ♦

1. With a view to agreeing on a price policy to be followed in Italy, the
Military Government Section of this Headquarters called a conference 5-6 January
at which were represented other interested Sections of this Headquarters and
the field organizations primarily concerned, namely, the Central Economic
Committee, the Allied Control Commission and Allied Military Government
Headquarters, the Allied Military Government 15 Army Group, and the Allied
Commission for Sardinia....

2. The price policy embodied in these documents may be summarized as
follows:
a. As to prices of local goods, the inflationary trend should continue to be
resisted, and to this end the prices of certain important commodities should be
held at low subsidized levels for the time being. The determining of individual
prices or of general price ceilings, and the nature of the rationing system, are
special problems lying within this general policy and are matters to be dealt
with in the field.
b. As to prices of imported goods, the general policy is that all imports will be charged as book entry to the Italian
Government at landed cost, either in the appropriate foreign currencies or in
lire as the Combined Chiefs of Staff may direct. The prices at which the imports
will then be sold should in general be not less than landed cost; but sales at a loss may be permitted if a price based on landed cost is
so high as materially to disturb the general price structure. The resulting
subsidy in these latter cases will be for the account of the Italian Government.
Even though legal retail prices are not fixed, Allied authorities will watch and
if necessary control the retail price of imported goods, consulting with Italian
authorities where appropriate.
c. As to prices of exported goods, Italian producers will be paid in lire at
prices judged to cover actual production costs plus a fair margin of profit
except where a lower price prevails in the open market. The goods thus purchased
for export will be sold abroad at prices prevailing in the market of sale,
except in the case of French Africa and Corsica where prices will be related to
f.o.b. prices of comparable articles in world markets....
6

3.... (1) On behalf of Headquarters ACC/ AMG, Colonel Bernstein gave a
general review of the rise in prices which had been going on and is tending to
go on in all regions of Italy and dealt with the price control system adopted to
arrest such upward movements, namely the fixing of legal prices for basic goods
and the

[350]

issuance of a general list of price maxima as a guide to local enforcement.
The view was expressed that rise in prices was inevitable, but that it should
be slowed down, particularly during the next three to six months. In his view it
would continue to be necessary to subsidise certain basic commodities and to
control prices for them, as letting all prices move up to the level of landed
cost would only upset the present structure and would lead to further increases
in wages. ♦ ♦ ♦

... At a meeting of AMG officials in Algiers on 5 and 6 January, it was
agreed that price increases in Italy are in general to be resisted and that the AMG will continue to have the responsibility for establishing legal prices for
basic goods. However, the control and fixing of maximum prices was delegated to
operations in the field, and it was agreed that each case was to be dealt with
locally on its merits within the framework of the general policy.

The fixing of satisfactory and enforcible maximum prices is, as our own
experience in this country indicates, an extremely difficult task calling for
the services of experts in all lines of business. Even to fix and adjust maxima
for basic commodities only will require the continuous efforts of a specialized staff. AMG does not appear to have any such
staff at the present time. Furthermore, the fixing of maximum prices in relation to cost in a period of
tremendous scarcity and rapid inflationary rises is next to impossible. Certain vital prices in
Italy, such as the prices of wheat and coal, are heavily subsidized by the government and cannot be
increased from artificial levels without serious disturbance to the whole cost of living. All in
all, the prospect for price control is not bright. ♦ ♦ ♦

II Situation at the beginning of March 1944
Control over prices and wages had
almost completely broken down. Control of wages was mostly confined to government, public utilities and banks. Control of prices
was largely confined to the part of the wheat and olive oil crop which was
amassed, and to imported foodstuffs. Public utility rates, railroad rates and
fares also remained under control, and the law freezing rents was still being
observed wherever tenants continued to occupy the same premises that they had
occupied before the Allied invasion.

Furthermore, such control as existed was largely local in character, and
without central coordination. In the four provinces of Apulia that had remained
under the King's administration, price regulations in effect were largely those
existing under fascism, with minor modifications but without effective
enforcement. In Sicily, price restrictions had been removed on all but a few key
commodities. In Naples, enquiry revealed the existence of an extensive list of
price ceilings which AMG had imposed in October 1943, upon entry into Naples,
but which no attempt was being made to enforce.

III Establishment of the Price Group

The Price Group was created on 8 March 1944, to reconcile and combine the
viewpoints of the various subcommisisons on price policy. ♦ ♦ ♦

♦ ♦ ♦ In the deliberations of the Price Group, there have usually been two
principal points of view. First, the Subcommission which makes the
recommendation, usually either Agriculture or Industry and Commerce, is concerned with setting a price that will
encourage production, and somewhat reduce the temptation to sell through
illegal channels. This may mean, and often does mean, not merely a price that will enable producers to make both
ends meet, but often one that will be sufficiently attractive to producers to
evoke a spirit of semi-voluntary cooperation with the authorities....

The opposing point of view was usually held by the Finance and Labor
Subcommissions. Finance was influenced by its policy of holding the line
against inflation into resolving every doubt in favor of a lower price rather
than a higher one. Labor was concerned with the fact that while the Price Group
was continually recommending increases in official prices, the Labor Subcommission itself was under rigid orders to hold the

[351]

line against an increase of wages, and was doing so with considerable degree
of success, at least in those occupations in which some control of wages is
possible.

The final recommendations of the Price Group have, on the whole, represented
the first of these two points of view rather more than the second. The reasons
for this were:

(1) that there was usually some doubt, often considerable doubt, as to
whether any price limit would actually be enforced, and
(2) that a feeling of conviction, however strong, that cost statement was
inflated, did not suffice to indicate precisely what the correct figures would
be, and
(3) an almost complete lack of relevant information.♦ ♦ ♦

A serious view is taken here of the critical nature of inflationary
developments in Italy. It is recognized that political and military conditions
make it difficult at this time to introduce and administer measures to counter
effectively the inflationary pressures. ♦ ♦ ♦

In view of increased import programme, is it possible to arrange with Italian
Government to impose and enforce stricter measures against black markets?
Programme of control of Italian Government finances and curtailment of
budgetary deficits should be pursued with utmost vigor by ACC and the Italian
Government should be made fully aware of its responsibility for taking all
possible corrective measures.
Also request ACC to continue vigorously its present efforts, both as to
maximizing production and facilitating transportation and distribution in
connection with local crops.

2. The present position regarding price controls is chaotic. A large
proportion of the existing legal price limits are disregarded by everyone. The
civilian population is coming more and more to take it for granted that laws
regarding prices exist only to be broken. This situation tends to bring all laws, and the
authorities who make or sanction the laws, into disrepute.

3. This headquarters believes that price controls should be retained only in
connection with those commodities for which:
(a) price control is urgently necessary for reasons of economic policy, and
(b) enforcement of price control is practicable.

All price controls which do not satisfy these conditions should be abolished,
and all restrictions on trade in commodities not subject to price control should
be abolished...

4. It is the view of this headquarters that price controls can be enforced
only if accompanied by effective control over supplies and channels of
distribution. Hence this headquarters desires to proceed immediately with a
review of the existing price controls, to determine which ones should be
retained, and to have established and enforced a uniform and workable system of
price controls for all of Italy free of the enemy. ♦ ♦ ♦

4. Stricter price control, control of distribution and of the allocation of
consumer goods, raw materials and equipment, are extremely important, but in
the present state of supply will be palliatives and insufficient to avoid
inflation.

5. Although the financial measures are important, most of them cannot be
effective in the immediate future.

6. To prevent rapid deterioration of the Italian situation, some increase in
the import of consumer goods, raw materials and equipment is essential.

BUT WITHOUT CONTROLS THINGS WOULD HAVE BEEN WORSE
[Econ Sec, ACC, Rpt, 1 Sep 44]

♦ ♦ ♦ Only that measure of interference with normal economic incentives which
limited personnel of ACC has been able to accomplish has prevented more serious
inflation, starvation and serious disorder. Only the controls supervised by ACC have prevented a
much larger portion of available food from going to the black market at a higher
price. This in turn would have increased labor unrest and demands for

The degree of inflation has of course increased. The exact increase in the
price index and in currency circulation will be found in the Monthly Reports of
the Finance Subcommission for July, August and September. The Government deficit
has increased as more territory has come under the jurisdiction of the Government. Allied expenditure has also increased.
There is still an extreme shortage of practically all goods....

[Rpt, Allied Anti-Inflation Comm. (Italy), 19 Jun 44, ACC files]

3. Prices in liberated Italy have increased considerably more than have means
of payment.... A cost of living index computed by ACC for Region 3 (which
includes Naples Province) and covering clothing, rent, fuel and miscellaneous,
as well as food, shows a rise of 320 percent since June 1943, and 133 percent
since September.♦ ♦ ♦

2. Information on Italian State finance is difficult to obtain because of
the scarcity of able Italian finance personnel; lack of Italian governmental
files, communications and transportation facilities; dislocation and other
difficulties caused by the war; and the absence of the Government from Rome.

3. The Italian Government has been operating at a deficit since the fiscal
year 1930-31. In the last quarter of 1943, the Government has had only four
provinces of Puglia (Bari, Brindisi, Lecce, and Taranto) to draw on for its
revenues. Normal State expenditures in these four provinces usually greatly
exceeded revenues. From 12 September 1943, on top of the normal expenditures
were imposed the expenditures of the Central Government.

6. The deficit of the Government in the last quarter of 1943 was financed by
advances from the Banca d'Italia (around three-fourths of the total), and AMFA
(around one-fourth of the total). The bulk of the funds advanced by the Banca
d'Italia came from bankers' deposits funneled into the Banca d'Italia by
shutting off other outlets for bank funds. ♦ ♦ ♦

... Due to prospect of gradual termination of AMG and in conformity with
terms of the Surrender of Italy, under which the Italian Government will make available such
Italian currency as the United Nations may require, it is considered highly
desirable that provision of supplies of AM Lira notes should be suspended and
superseded as soon as practicable by supplies of Italian currency. Pending
possession of adequate printing facilities and supplies of Banknote paper in the
area, arrangements should be made here or elsewhere on behalf of the Italian
Government for the production of such lira currency.

It is requested that you now enter into further negotiations with the Italian
Authorities relative to supplying of Italian currency as indicated above, and
that you keep us advised of developments. Production demands on the Treasury
Department make it difficult to increase its present delivery schedules of
Allied Military Lira currency.... ♦ ♦ ♦

8. The Italian Government has no facilities for producing its own currency.
Although the armistice terms provide that the government shall make available
such currency as the Allied Forces require, actually it has been necessary for
us to supply the Government with currency. Arrangements are now being made to
use the facilities of American bank-note companies under the supervision of the
United States Treasury for the manufacture of Italian lire, and to import
plates, ink, paper, and other necessary supplies into Italy so that the currency
eventually can be manufactured in liberated Italy.7

[353]

ALLIES URGED TO HELP THE GOVERNMENT SERVICE ITS PUBLIC DEBT
[Msg, AFHQ to CCAC, 24 Oct 43, OPD Msg files, CM-IN 14687]

Italian government meeting service charges on debt in Sardinia and four
provinces of Puglia, and issuing postal savings funds in Sardinia. It appears
evident service charges must generally be met in non-German occupied Italian
territory in order to pave way for improvement in public credit essential to
handling fiscal problems, including mopping up of excess funds in hands of
public. Consequently it is urged that change be made in monetary directive so as
to permit resumption by Italians of service on Italian debt and permitting AMFA
to advance AM lire for this purpose....
8

DIRECT ADVANCES MAY BE MADE BUT GOVERNMENT EXPENDITURES SHOULD BE HELD TO A
MINIMUM
[Msg, CCAC to AFHQ, 17 Nov 43, OPD files, 311.23, CAD,
sec. VI ]

... AMFA is authorized to make advances to Italian Government, including the
Italian armed forces, whenever such action is deemed desirable in view of
military necessity and duly related circumstances.

In TAM 66 [TAM-MAT, the cable series between CCAC and AFHQ] we advanced the
general principle that Italian needs should be handled through regular banking
channels in so far as possible and AM Lire supplied to the banks when the
banking system is short of currency. This principle should not be followed if
you determine that you can more effectively enforce controls which should be
exercised over Italian expenditures by advancing funds directly to the Italian
authorities rather than by having the Italian authorities obtain their funds
from the banks.

It is necessary, in the interest of checking inflation, to keep expenditures
by the Italian Government to a minimum. Control by the Control Commission and
its agencies over budget, pay of troops, etc., will therefore be necessary. The
method of such control can best be judged by those on the spot. You should,
irrespective of shortage of currency, maintain sufficient control or scrutiny of Italian expenditures to satisfy yourself that anticipated
expenditures are proper and reasonable in amount. You should make arrangements
so that a statement of anticipated Italian expenditures and receipts be
furnished to you at stated intervals. ♦ ♦ ♦

5. The existing Italian budgetary procedures make impossible any scientific
expenditure control. A more efficient system of procedures is being prepared.
No attempt was made to control expenditures of the Badoglio Government until
December, and even then, there was not enough data available, and due to poor
communications, not enough could be collected in time to permit any substantial
control over the December budget. ♦ ♦ ♦

(94) During the month there was a partial resumption of the servicing and
amortizing of the Italian state debt, which was received very favorably by the
public. The amount of Italian 4% Treasury Bonds, 1934-43 issued in Sicily and Region II was small, and the repayments to date have involved an even smaller
cash turn over than was anticipated. The resumption of full dealings in one-year
Treasury Bonds on 15 December ... has resulted in new subscriptions ... which
already exceed the repayment of three months' arrears in maturities and the
sales of unmatured bonds. ♦ ♦ ♦

4. As soon as the branches of the Banca d'Italia were again part of a
functioning central banking system, arrangements were made for the Banca
d'Italia to assume responsibility for financing all Governmental expenditure.9 This system eliminated the need for ACC to advance currency

[354]

for Italian Governmental uses. The Allied Financial Agency [AFA] had earlier
advanced money to help meet communal, provincial and state deficits. Through the
institution of a system of financing whereby the public deposited money in the
banks, the banks redeposited the money at the Banca d'Italia, and the Banca
d'Italia made the money available to the government, the necessity for further AFA advances was eliminated.

From 30 January 1944, no AFA advances were made to the National Government.
This system was extended to the AMG regions and from 1 May 1944 all advances of AFA funds on any level in the AMG regions were stopped. Only in the AMG Fifth and Eighth Army
Areas may such advances still be made. Even here, these are greatly minimized by
using the Banca d'Italia to move currency forward as soon as possible. Not only
were all currency advances by AFA for Italian governmental purposes stopped, but
the Banca d'Italia was able to make an initial repayment of AFA of over
one-third of the previous advances made, or a total of 2,100 million lire. ♦ ♦ ♦

THE GOVERNMENT NEEDS FINANCIAL AID BUT CAN GET LITTLE MORE THAN ADVICE
[Interim Rpt, Italian Govt Finances-Last Quarter of 1943]

3. If any substantial volume of resources were provided to the Italian
Government by the United Nations most of the problems of the Badoglio government
would be solved for the present. (The provision of AM lire cannot be regarded,
of course, as aid in this sense, as AM lire under the Armistice Terms are an
obligation of the Italian government not of the United Nations). However, the
basis on which we must operate is that the Italian government must in the main
meet its difficulties with the resources available to it.

4. The mission of the Finance Subcommission must therefore be that of aiding
the Badoglio government in conducting a rear-guard action. The best that we can
do is:

(a) Assist the government in increasing its revenues within the narrow limits
possible of the existing taxation system.
(b) Control expenditures by making sure that they are made for approved
purposes and that there is a minimum of waste.
(c) Assist the Italian government in rehabilitating its credit as best it
can in view of the situation.
(d) Exercise as much of a drag as possible on inflation by holding down the
issuance of new currency to the bare minimum.
(e) Use our influence through the Ministry of Finance to discourage increases
in costs, prices, and incomes.

1. The Italian Government's argument as presented in Marshal Badoglio's
letter and as presented orally by the Minister of Finance to representatives
of the Finance Subcommission from time to time is briefly as follows:
10

(a) The present rate of exchange increases substantially incomes of soldiers
spent in Italy and constitutes, therefore, the major inflationary factor.
(b) People in Italy are "exchange rate conscious." The sharp downward
revision in the exchange value of lire has caused psychological reactions which
have aggravated the inflation problem in liberated Italy.

2. The extent to which soldier expenditures constitute an inflationary factor
in liberated Italy is exaggerated in the Italian Government's argument. A
reduction of these expenditures will not change the course of inflation in
Italy, although it may slow down the inflationary process. ♦ ♦ ♦

3. . . . Distrust of the currency is undoubtedly present in Italy; and it may
have some effect in stimulating inflationary price movements. But will one
exchange rate rather than another change distrust into confidence? Changes in
the exchange rate, whatever the character of the change, are an extremely
important factor in creating distrust. To change the exchange rate now would
increase the distrust of the people in the currency, particularly since the
currency would be fixed at a value which is obviously too high to be maintained
over a long-run period.
11

♦ ♦ ♦ While this headquarters concurs in the general recommendations as to
taxation and revenue contained in Section III of the body of the report, it
expresses no opinion on the recommendations set forth in the Appendix entitled
"Reform of the Italian Tax System." It is believed that the implementation of
the general recommendations in the body of the report must remain primarily a
matter for the Italian authorities. Implicit in the development of the policy of
tax rates and exemptions are a number of broad social and political questions
which this headquarters does not undertake to appraise.

1. An administrative memo of the Headquarters (No. 95 of 1943) has governed, since December 1943, Allied local procurement of supplies, services and facilities in
Italy. This memo was premised on the obligation of the Italian Government
under the Armistice terms to make available such resources or services as the
U.N. may require [see Chapter IX, Section 51. The general policy, accordingly,
except in combat zones or for minor day to day procurement, was to avoid payment
by Allies.

2. There have been numerous exceptions to this policy of non-payment. Such exceptions have been due to difficulties of
the Italian Government in arranging financing for firms which supply services,
goods or facilities to Allies and which need cash to maintain operations, and
have been due to serious shortcomings of Italian Government procurement
services.

3. Administrative memo No. 95 modified on 1 August 1944 by Administrative Memo 31 of 44 was drawn up to meet this situation. This directs ACC to require the
Italian Government (a) to improve the procurement services and (b) to set up a
lira account to enable the Allied Forces to make cash payments for supplies,
services and facilities where it is impracticable to have recourse to Italian
procurement agencies. Wherever feasible, the general policy of nonpayment is
preserved.

4. The lira account, which would operate comparably to the franc account in
North Africa, would have the following advantages.

a. The expenditure of funds drawn by Allied Forces from AFA, which are
charged to Armed Forces appropriations in Washington and London, would be
reduced since payment would be out of funds provided by the Italian Government.
b. Payments to local enterprises would be facilitated because of reductions
on Allied side to pay and the long delays on the part of the Italian Government
in arranging direct reimbursement.
c. The Italian Government would be encouraged to improve procurement
services to Allied Forces (the franc account in North Africa operated in this
way).

5. There have emerged out of protracted discussions between ACC and this
Headquarters the following political objections to the establishment of a lira
account at this time.

a. The quantity and value of Allied procurement, supplies, services and
facilities in Italy would be revealed to the Italian Government.
b. It would focus attention on the obligations generally of the Italian
Government under the Armistice by rendering visible the present invisible
deficit that is currently accruing to the Italian Government.

6. Prime Minister Bonomi and Minister of the Treasury were presented
informally with the terms of administrative memo No. 31 on 9 October 1944. The political effect of the proposed lira account would be "disastrous" according to the statement of the
Prime Minister. Adverse public reaction is feared by Bonomi to any step by the Government to assume direct and

[356]

open responsibility for Allied payments in Italy since this would imply that
our Government had abandoned efforts to obtain a modification of the financial
clause of the Armistice. Bonomi also fears the effect of additional deficit
financing on public confidence. Such additional deficit currently would be over
one and one half billion lire per month.

7. From the standpoint of financial policy and from a technical viewpoint,
this Headquarters considers the establishment of a lira account desirable.
Pending advice from you whether political objections override the advantages,
action however is being delayed.
13

1. On 9 Jan 45 the Minister of Foreign Affairs of the Italian Government
presented to the Allied Commission in Rome a long memorandum dealing with the
economic and financial difficulties faced by Italy and with the financial
measures the Italian Government believes necessary to mitigate these
difficulties.

2. Briefly summarized, the Italian memorandum argues as follows:

a. The financial situation of Italy is extremely difficult since both the
national deficit (estimated at 300 billion lire) and the need for reconstruction
expenditures are rapidly increasing.
b. The memorandum lists certain remedial steps which can be taken. . . . It
is argued that little can be done along any of these lines if the Italian
economy is in imminent danger of economic and financial collapse. The first
condition, therefore, is that the Allies furnish financial relief designed to:

(1) Increase the confidence of the Italian people in the lira, and
(2) Make possible the purchase of essential supplies abroad.

c. This financial relief should take the form of setting up credits in
dollars or sterling corresponding to (I) the total amount of AM lira issued by
the Allies, and (2) the total payments by the Italian Government on behalf of
the Allies, whether chargeable to the "costs of occupation" or the costs of
carrying the war against the enemy from Italian soil.
d. In leading up to this proposal the memorandum is at great pains to make a
distinction (which is not carried over into the proposals) between the costs of
occupation and the costs of carrying the war against the enemy from Italian
soil. The memorandum also dwells on the contradiction between the Treaty of
Armistice and the state of co-belligerency, quoting the announcement that the
conditions of armstice would he modified in Italy's favor to the extent of
Italy's contribution to the common war effort.

5. The tone of the memorandum reveals a sense of self-righteousness and a
lack of realism. . . . The memorandum places stress on the destruction wrought
on Italian soil by the use of the country as a battlefield; but the use of Italy
as a battlefield is surely to be traced to her participation in the Axis
partnership rather than to a voluntary choice by either Italy or the Allies.

6. The Allied Commission agreeing that Italy needs financial relief,
emphatically does not agree that the Allies owe it to Italy in any legal sense.
It is therefore recommended that the proposals summarized in paragraph 2 c above
not be approved by the Governments of the United States and the United Kingdom.

7. It is further recommended, however, that further measures of financial
relief for Italy be urgently adopted by the United States and/or the United
Kingdom Governments, even if such measures cannot result in any early
purchase of shipments of supplies.♦ ♦ ♦

♦ ♦ ♦ With
this recommendation of the Allied Commission I am in strong disagreement, on
three grounds: (a) The Italian financial situation is not one in which foreign
"stabilization" loans will be of any material benefit. (b) The Italian
Government and the Italian people should not be led to expect that their
financial and economic problems can be solved by entries in the books of the
U.K. and U.S. Governments or central banks. (c) Having in mind the heavy demands
that will be made on the U.K. and U.S. Governments by all the liberated
countries, dollar and sterling credits should be related to approved programs of
rehabilitation and not granted in bulk sums in advance solely for their
anticipated psychological effect on the internal financial situation of the
borrowing country. ♦ ♦ ♦

... Were I a Provincial Commissioner I would have plastered up on every wall
in my Province the fullest details regarding the taxes that we have to bear in
England. It would be an eye opener to these people and might cause them either
to reform or to abandon themselves from the highest precipice.♦ ♦ ♦

The next time you have a protest regarding taxation, I suggest you bring the
following points home to them. Our opinion is continuously being sought
regarding 1) inflation and 2) whether we intend to maintain the value of the
Lira. You do not require me to tell you what effect that non payment of taxes is
going to have on the former. Regarding the latter, are we likely to bolster up
the value of the Lira when the Italian people themselves are not prepared to
play their part? Every province brings forward excuses why it should not pay
taxes. ♦ ♦ ♦

Supply authorities, both U.S. and U.K., gravely disturbed by increasing size
your requirements of food for civil relief, which if fulfilled, are bound to
have serious effect on other commitments. It is therefore of greatest
importance that U.K. and U.S. Governments should be in possession adequate
information as to conditions in Theater, particularly as regards food, so that
they can relate your requirements to other needs. In absence of such information
it might become necessary to consider cutting down your demands because of their
impact on other requirements which may have equal or greater priority since
position may soon arise where your and other demands cannot be met in full.

In order to avoid this necessity, or to ensure at least that in any necessary
reductions the claims of your theater are fully represented and understood, it
is most desirable that study should be made on the spot by persons who have
knowledge of overall requirements and can report on conditions which have
necessitated increased demands. Such information will also be of greatest value
in planning for other areas. ♦ ♦ ♦

... One of the outstanding conclusions to be derived from the Italian
experience is that the greatest possible effort should be directed towards agricultural
rehabilitation, the purpose being to hold the demand for foodstuffs made upon
U.S. and U.K. to the absolute minimum. In Italy and Sicily indigenous production
has failed to meet expectation by a wide margin, and it has been necessary to
import considerable quantities of foodstuffs, with the resulting drain on U.S.
and U.K. stockpiles and shipping.

ABOUT THE SAME TIME BADOGLIO APPEALS TO ACC FOR MORE FOOD IMPORTS
[Ltr,
Badoglio to Mason-MacFarlane, Chief Cmsr, ACC, 26 Mar 44, ACC files,
10000/136/384]

I submit to your benevolent study the very grave problem of food supply for
the populations of the liberated territories. As you are aware, almost all
supplies in the "Ammassi" have been exhausted for some time.
So that the food supply is now based almost exclusively on the ration
distributed by the Allies. ♦ ♦ ♦

This ration reduced to calories, we have from 500 to 540 calories per person,
compared to the 3000-3200 necessary for the average person for light work, and
4000-5000 necessary for heavy work.
These figures, in the enormous gap between what is and what should be, are so
painfully significant as to require no illustration on my part.
And as this situation is closely connected with agricultural production and
social tranquility, I make once again a warm appeal to you so that once again
you will bring all your influence and friendship to bear on this problem which
is not

[358]

only Italian, but has similar importance also for the United Nations.

ITALIANS ARE TOLD THEY WILL HAVE TO DEPEND MORE ON THEIR OWN RESOURCES
[Ltr, Mason-MacFarlane to Badoglio, 31 Mar files, 10000/136/384]

♦ ♦ ♦ I agree that the calorific value of this ration is small but you know better
than I to what extent the population can obtain supplementary food such as
vegetables and nuts which are very high in calorific property. Vegetable and
nuts which are very cheap can more than make up for all the calorific losses due
to deficiencies in the other part of the ration.

You plead for importation of more food. I must point out to you, however,
that while giving every consideration to this the Allied Nations must take the
view that the remedy in part lies in the hands of the Italian people themselves.
It is true that almost all the supplies in the Ammassi have been exhausted. It
is equally true that the Italian producer has signally failed to take his quota
to the Ammassi. There is, I believe, sufficient olive oil in occupied and
liberated Italy to feed the whole population on an adequate ration. It has not
been produced. It will be difficult to persuade the people of the Allied Nations
to help a population which in this respect has failed collectively to help
itself.

I must remind you that with the advent of the harvest imported supplies from
abroad will decrease as this country will be expected to depend more and more
upon its own resources. This is a question of agricultural production and
distribution and it is the duty of the Italian Government to do everything
possible to ensure maximum production of all foodstuffs, and their availability
to the population.

♦ ♦ ♦ a). The estimates of number of ration cards are prepared by the Italian
Provincial Officials and are used as the basis for computing import
requirements. These estimates are admitted by the Italians themselves to
represent higher figures than the actual number of population requiring rations.
Moreover the Italian Government itself has no record of number of farmers who
retained official allowances of their own products. The present percentage of 75% of total population represented by ration cards against which imported flour/wheat is
issued in presently occupied Italy is considered by the Group as inflated and
should not be used as indication of population to be fed with imported grain
during future operations in other areas. Although efforts are being made to
obtain more accurate ration card figures Provincial Supply officers of ACC are
not yet in- a position to give revised figures.

b). The Group believes that this situation results in larger demands for
imported food supplies than are actually needed. Reductions in total
requirements of the Italian area after 1 August 1944 could undoubtedly be
effected if proper machinery were instituted for obtaining more accurate
estimates of the number of ration cards actually required.
14 ♦ ♦ ♦

3. In making specific application of . . . basic directives to agricultural
work in Italy, it would appear that the maintenance of wheat production at the
highest possible level and an equitable distribution of the amassed product are
highly desirable if Allied shipping and supplies are to be conserved. This
Theater requested last December that 700,000 tons of wheat and flour, in
addition to other foods, be imported into Italy for civilian feeding during the
first six months of 1944. It is to be hoped that an effective production and
amassment program for the crops in Italy will prevent a recurrence of such
enormous requests this coming season, when all of the Allied resources may be
taxed to the utmost. Notwithstanding long-term considerations in respect to
Italian agriculture, it is far better that Italians produce wheat, even at a
temporary economic loss, than for Allied lives and ships to be lost in importing
it as was the case this season. Wheat is not a new crop being foisted upon
Italy, and considerations which have to do with soil exploitation should be
submerged during the war emergency, as has been done in the Allied countries
that supply the wheat imported into Italy. The debatable issue of what is best
for Italian

[359]

agriculture from a long-time policy viewpoint is not a strong factor under
present war circumstances of necessarily having to limit all shipments of
civilian supplies to the minimum. A prime objective of military government work
in agriculture is to see to it that this saving of shipping is accomplished. ♦ ♦ ♦

1. The terms of the decree ordering the collection of grain is to be enforced
in Sicily with the greatest vigour. We must expect opposition and obstruction
from the people and drastic measures will be necessary.

2. The following action by the Italian Government, ACC and other authorities
is recommended:

A. By the Italian Government

(i) A firm statement should be made by the Prime Minister over the air and in
the Press, to be repeated at frequent intervals, making it clear:

(a) that the price of L. 10000 per quintal will not be increased by war bonus
or any other means;
(b) that the collection of grain will be enforced by every means at the
disposal of the Government and that heavy penalties will be imposed on
offenders;
(c) that it is the duty of all Sicilians to make themselves self-supporting
as an Island by bringing in the grain for proper distribution.

(ii) This statement to be followed by continuous propaganda and to be backed
up by personal tours of the Island by the Minister of Agriculture and if
possible the Prime Minister himself (not by Under Secretaries), directed
towards the collection of grain and not towards political purposes. The High
Commissioner and Signor Orlando should carry out similar tours.

(iii) Direction to be given to the High Commissioner and the Italian
tribunals that penalties against the decree must be increased to the maximum
and offenders brought immediately to trial.

(iv) Instructions to be issued by the Ministers of Interior and Agriculture
to Prefects and Agriculture Inspectors insisting on drastic action being taken
and a Special Order of the Day to be issued to the Carabinieri concerning their responsibilities in helping to
collect the grain and to arrest speculators.

(v) Arrangements to be made (with MMIA [Military Mission to Italian Army]) to
place the maximum number of Armed Forces (including Carabinieri) at the
disposal of the High Commissioner to enforce the decree.

(vi) The acceleration of the promulgation of the road haulage decree which
enforces the formation of the Provincial Consorzi to utilise private trucks on
call at fixed tariffs. ♦ ♦ ♦

B. By the Vatican

The intervention with special directions to Cardinal [Luigi] Lavitrano for a
special drive through the Churches.

C. By A.C.C. Headquarters

(i) The appointment of Colonel A. E. Young, Assistant Director of Public
Safety Subcommission, as officer in charge of enforcement of grain collection
under the authority of Regional Commissioner, Region I.

(ii) Arrange for the employment in Sicily of 7,000 parole POW about to be
made returnable to the Italian Army or for the dispatch of two battalions from
elsewhere.

(iii) Arrange for the immediate dispatch of inner tubes for motor tyres for
requisitioned cars.

(iv) Consultation with the Ministry of Justice for the rapid trial of
offenders against the decree.

(v) Immediate consultation with PWB and PRO [Public Relations Officer] with
the object of getting out forceful propaganda appealing to the emotions of the people and dispatching suitable officers for this
purpose. ♦ ♦ ♦

MEASURES ALSO PROPOSED AGAINST UNDUE USE OF LOCAL RESOURCES BY MILITARY
FORCES
[Memo, Gen Alexander, GOC, AAI, for AFHQ, 21 Jul 44, ACC files, 10000/596/427]

5. The essence of the criticisms levelled in the report against the working
of the Local Resources Board is that, instead of confining itself to allocating
among the Armed Forces that amount of local resources which has been found by
the Allied Control Commission to be surplus to minimum civil requirements, the
Board has arrogated to itself the function of determining also the civil
requirement. To some extent there is ground for this criticism. In the first
place I do feel that the

[360]

influence of the Allied Control Commission on the Local Resources Board and
its Committees has not received due weight. .. .

8. To correct the alleged shortcomings of the Local Resources Board, the
report proposes the creation of an "Allied Economic Council." .. . The task of
this Council would be to assess minimum civil requirements. The Local Resources
Board would remain in being and be responsible for allocating the surplus after
the civil requirement has been determined....

10. The Local Resources Board is an established organization. It
unquestionably gives satisfaction to the fighting Services. Its procedure is
understood. I think that it would be a great pity to weaken it by the
establishment of a second and overriding body.
15♦ ♦ ♦

2. Sicily has one major problem at present-the collection of its own grain
harvest. One of the two recognized deficiency provinces has collected 60% of its
quota. Palermo has collected less than 6%. In spite of vigorous action of
prefects, ACC officers, etc., satisfactory results are not yet being obtained. The new High
Commissioner, [Salvatore] Aldisio, did not think it possible to collect more
than two thirds of the quota. He believes there is organized resistance in some
provinces and that a social security problem is looming ahead. In practice the
policy of laying down quotas is not working out.
16 ♦ ♦ ♦

10. . . . The High Commissioner is, I feel, untiring in his efforts to
achieve a successful amassing, but he cannot obtain co-operation and is severely
handicapped by lack of drive and a spirit of laissez-faire (coupled with the
normal official working hours) from all subordinate offices, and passive
resistance on the part of the farmers, including the big landowners....

11. Presumably, it might become necessary in the not too distant future, in
view of the grave bread problem with which the Island may be faced, to take some
stern and comprehensive measures, such as the requisitioning of all grain on the
Island and of all mills. Such measures could only be taken if backed by
sufficient force.

AN EARLY SUGGESTION WHICH WAS AGREED WITH BUT COULD NOT BE FOLLOWED
[Ltr, Southard, 22 Sep 43]

♦ ♦ ♦Import basic commodities such as wheat and sugar for resale.

It is recognized that this action gives rise to serious policy problems.
17 But there are two reasons why
it would be helpful. One, as everyone knows, is that it will weaken the
speculative forces now maintaining the black market. The second is that it will
give farmers a greater incentive to sell their crops if they can buy some
coveted article such as sugar with the money they obtain. In many countries
under similar circumstances it has been the common experience the farmers prefer
to hold commodities instead of money. ♦ ♦ ♦

5. p. . . . The Sicilian and Italian experience indicates the importance of
importing limited amounts of agricultural and industrial supplies. Even where
apparently not justified by military consideration, such a program would in fact
aid the military effort by increasing the local production and thus saving
shipping. This of course should be the test. But other benefits include a
reduction in unemployment and the relief burden and an improvement in internal
security. ♦ ♦ ♦

(a) Conditions in Italy require rigorous amassment of essential food crops to
provide for equitable distribution of domestic products at reasonable prices.
Successful amassment will be dependent upon (1) establishing and enforcing an
equitable system of prices and rationing for products to be amassed and also for
essential items used in production and in living, and (2) establishment of an
effective amassment organization.
(b) For the immediate future, amassment should cover wheat and barley, pulse,
and olive oil.

3. Fertilizers.-Phosphates and nitrogenous
fertilizers must be made available if Italian food
production is to be maintained at desired levels.

(a) Nitrogenous fertilizers cannot be produced domestically in adequate quantities in time for the 1944-45 crop season, and Allied imports of minimum needs will be required.
(b) The domestic capacity for the production of superphosphates should be
utilized by arranging for the importation of rock phosphates and of materials
needed for practicable emergency rehabilitation. ♦ ♦ ♦

ALLIED OFFICIALS ARE ALSO ADVISED TO CALL FOR DRAINAGE AND IRRIGATION
MATERIALS
[Digest of Memo of 5 May 44, Dir, Agriculture Subcom, ACC to Rgnl Cmsrs for
Agriculture and Other Officers, in the Brochure, Reactivation of Italian
Agriculture, Rome, Jul 44, p. I, ACC files 10000/109/825]

2. a. Basic economic policy of Allies is to revive economic life and
stimulate production in order to reduce to a minimum the needs of Italy from the
Allies and to develop Italy as a source of supply for further operations. ♦ ♦ ♦

d. The over-all criterion of essentiality in emergency rehabilitation is that
of saving shipping space and conserving essential Allied Supplies. If the import
of a few tons of parts for drainage or irrigation machinery would result in the
production of large quantities of essential foods that would otherwise have to
be imported during 19:75 there is reason for a specific request accompanied by a
well-considered statement of justification. ♦ ♦ ♦

The Economic Section of the Commission recognizes, and the Committee
concurs, that in order to provide a minimum of essential consumers goods as an
inducement to farmers to bring their crops within governmental control and to
provide a minimum subsistence for all persons in the liberated portions of
Italy, there must be a marked increase in the supply of consumers goods. It is
also recognized that shortage in tonnage and a short position in consumers goods
industries in the United States and the United Kingdom militates against any
considerable increase in imports to Italy of civilian supplies. It is therefore
the objective of the Allied Control Commission and of the Italian Government
insofar as possible to

[362]

bring about the increase in the supply of consumers goods through domestic
production and manufacture. In this way, it is hoped to obtain a maximum
increase in civilian supplies with a minimum import of consumers goods and those
raw materials, equipment and transport which would make possible local
production and distribution of consumers goods in quantities considered
essential. ♦ ♦ ♦

Requisitions for imports of clothing, footwear, and materials for their
manufacture and repair were forwarded by the Allied Control Commission to Allied
Force Headquarters on 10 March 1944.♦ ♦ ♦

The Committee wish to emphasize the extreme importance of meeting
these requisitions immediately as an aid to combatting inflation. ♦ ♦ ♦

. I am authorizing a temporary increase in the bread ration now officially in
force in southern Italy to 300 grams effective i July. This is an increase of 40
grams over the previously authorized target figure of 260 grams, but only 200
grams have been possible from the recent supplies under our control. It is not
intended by this measure to increase the total bread consumption, and I am
reserving the right again to reduce the bread ration if the supply situation
after the harvest has been collected should make this necessary. ♦ ♦ ♦

The chief purpose of the proposed increase is to prevent the failure of the
program of amassing; that is, the collecting of grain in warehouses controlled
by the government. The proposed increase at this time would have a very great
psychological effect, and my expert advisers believe that it might make all the
difference between achieving a goal of 43% collection and failing to collect
more than 20 to 25%.♦ ♦ ♦

I have been influenced, in addition to reasons set forth above, by views
expressed in your TAM 162 [see Section 4] emphasizing importance of pursuing
stronger measures against black market and arresting inflation in Italy. It has
been reported by the Anti-Inflation Committee recently appointed by the Chief
Commissioner, in which representatives of British and American Treasuries are
included, that prevention of further rise in wages is the keystone of
antiinflation policy. Wage earners are now obliged to pay black market prices to
supplement ration of 200 grams. It will be impossible, if this continues, to resist general demands for wage increases which if granted would
intensify greatly inflationary situation. It is urged by the Committee that
black market in food and other necessities be broken by control of supplies at
source and by enforcement of strict rationing at controlled prices. If there is
no increase of the bread ration and vicious system of allowing supplementary
ration to be acquired in black market continues, we incur not only the grave
risk of breakdown of amassing program but every prospect of inflation getting
out of control and threatening seriously maintenance in liberated territory of
economic and social stability.

♦ ♦ ♦ Note is taken . . . that an increase of the official bread ration in
Italy has been authorized and announced by you. It has been shown by careful
study here that maintenance of the new ration scale would probably result in
wheat import requirements greater than shipping and supplies which are
available in the light of the needs of other European areas. Moreover, the hope
had been entertained that an effective amassment of the harvest in Italy would
bring about wheat-import requirements substantially less on a per capita basis
than those of the past season....

It is necessary, in the light of the above, now to advise you that you will
have to meet entirely from the Italian crop any additional consumption in which
the increased ration scale results.
19

♦ ♦ ♦ It is apparent that the purpose for which the temporary increase was
granted has been, in large measure, achieved. The amassment is, on the whole,
proceeding successfully, particularly in the areas where the larger ration has
been actually distributed. While it is impossible to measure the effects of
this factor with accuracy, I believe that there has been collected

[363]

substantially more of the current harvest than would have been the case had
the lower ration remained in effect. Moreover, the anti-inflationary effect of
the increase has been definitely felt. In Naples the black market dropped
rapidly upon increase of the ration, and the cost of living has since resisted
upward pressure, due largely to the availability of a subsistance ration without
recourse to illegal channels. Accordingly, I am satisfied that the action
which I felt compelled to take in June has proved well advised. ♦ ♦ ♦

9. In NAF 778 dated 13 September 1944 (C.C.A.C. 138) it is implied by AFHQ that the Theater cannot certify a
program of clothing for Southern Italy to be required within the limitations of
existing policy governing civilian supply during the military period.

10. In view of the foregoing, it is apparent that SACMED is unable to certify
the clothing program as required to discharge the military responsibility for
civilian supply within existing policy governing such responsibility. In the
absence of such certification under existing policy governing military
responsibility for civilian supply, the Sub-committee is not justified in
authorizing for procurement the program requested by SACMED. The program set
forth in LAC Air gram 32 should be referred to the Combined Liberated Areas
Committee for appropriate action.20

♦ ♦ ♦ No industrial rehabilitation will be undertaken in liberated Italy
which is not
A) Absolutely essential to military needs whilst the war is going on, and
B) Essential to the minimum civilian needs of individual territories.

Efforts to stimulate industrial output have .. . been greatly impeded by
several factors, including the general shortage and destruction of facilities
and supplies, and the priority requirements of the military operational
authorities. A further limitation has resulted from delays in obtaining imports of essential supplies. Such items as a few hundred tons of
caustic soda for the soap industry, or of carbide for miner's lamps in the
sulphur industry, and of explosives for coal mining, amount to little in the
aggregate as compared with the amount of local production for local use or for
export, which they make possible. Serious delay in the resumption of such local
production occurs when the arrival of these essential items is delayed for
months while the necessary requisitions are assembled and revised to meet the
precise formal requirements of the military supply system, and are forwarded
through the various headquarters -in the chain of authority until they finally
reach the agencies in Washington which will finally consider and decide upon
them, before they can be finally procured and shipped.

C. Restoration of Transportation Facilities is perhaps the most essential
factor in the resuscitation of Italian economic activity. In all three

[364]

phases-rail, road, and water, transportation facilities are far below the
minimum necessary to enable full use to be made of Italian manpower and to
reduce dependence on outside supplies. Dilapidation and destruction of existing
facilities, coupled with the heavy pressure of military demand for operational
purposes, make it difficult to procure transportation for even the most
essential civilian needs, and have compelled the application of strict control,
particularly in the case of the railways.

(1) Railway transport is under the control of the Director General of the
Military Railways, responsible to the Commander in Chief. Operation is partly
by military crews, partly by civilian railway men. After immediate operational
requirements are met, secondary military and essential civilian requirements are
dealt with on the basis of bids from the regions, filtered through the
Transportation Committee to the Movements and Transportation Organization of A.F.H.Q....

The serious need for repair of rail and equipment will become intensified as
additional territory is liberated, in view of the very effective procedures of
destruction being employed by the German forces. In view of the overall shortage
of transportation equipment required for the Allied war effort, it seems
unlikely that any substantial rehabilitation of Italian railways will be
accomplished for an extended period.

(2) Road transport is likewise in a very attenuated condition (aside from
military movement) because of the shortage and breakdown of vehicles. Local
road transport seems to rely largely on the two-wheeled native horse- or
donkey drawn wagons. As an emergency measure connected particularly with the
distribution of the emergency food imports, some one thousand trucks are in
process of being turned over by the military authorities for essential civilian
transport, two hundred to be operated by the military authorities with Italian
drivers and the balance to be operated, under A.C.C. supervision, by private
Italian transport companies. . . .

Thus with road transport as with rail transport, although some diversion of
facilities from military work has been arranged to meet the very minimum of
essential, civil requirements, any thoroughgoing rehabilitation of internal
transportation facilities, essential as it is to the improvement of local
economic activity, must wait until primary military necessity has been
satisfied. ♦ ♦ ♦

(3) . . . On the one hand there is a general deficiency of vessels of the
coaster type, and on the other hand such schooners as have escaped destruction
are either requisitioned for military purposes . . . or are in concealment or
engaged in uncontrolled "black market" activities.

1. Some degree of inflation is common to all countries at war, arising from
an increase in purchasing power without a corresponding increase in goods to be
bought. This characteristic rise in prices can only be kept in check by steps
designed to prevent excess purchasing power being spent e.g., taxation, public
loans, pegging of wages, control of prices, rationing, allocation of resources,
etc.

2. In the liberated portion of Italy few of the conditions necessary for
holding inflation in check could be expected to operate. The previous system of
taxation and war controls was identified with Fascism and in any event was
administered from Rome. The collapse of Fascism and the separation of liberated
Italy from the Capital paralyzed many branches of the Government. In the
circumstances, it is reassuring that the situation is not worse. Inflationary
tendencies are dangerous, but are not yet out of hand....

4. Three main forces are responsible for this rapid rise of prices in Italy.

a. The first of these forces is the very high level of Allied military and
Italian Government expenditure, financed principally by the exceedingly
inflationary methods of overdrafts on the Central Bank (in the case of the
Government) and disbursement of military lire (in the case of the Allied
expenditures). Some progress is being made in increasing tax revenues, but the
Government deficit is now running at about 3 billion lire per month.♦ ♦ ♦b. The second factor tending toward inflation in Italy is the extreme
shortage of practically all goods. This shortage, together with the rapid
increase in purchasing power mentioned in (a), has been responsible for the
growth of a black market of dangerously large proportions.
c. The third influence in the inflationary situation is public distrust of
the currency. This factor probably has not so far reached dangerous proportions.
People are still willing to deposit

[365]

money in the banks and are still buying postal bonds in moderately large
volume. But "regular" dollars and sterling sell at fluctuating premia in the
black market, a situation which is evidence of an incipient distrust of the lire
which may readily assume importance should the public lose hope of effective
stabilization.

5. The inflationary pressures are being held in check with the greatest
difficulty. The primary control is the pegging of wages, which in turn depends
on the purchasing power of current wages, in terms of a minimum subsistence
ration. The keystone of this structure is cheap bread and the success of bread
rationing at a low, subsidized price derives from getting control of the grain
harvest and reducing the temptation to sell in the black market. An important
factor is the willingness of the farmers and the public generally to hold cash
and bank deposits and to save money rather than spend it. As was indicated in
the preceding paragraph, a most dangerous situation would arise if people became
unwilling to hold money and rush to buy goods at any price, as happened in
Germany in the early twenties and as is now happening in Greece. ♦ ♦ ♦

It has been the understanding of the War Department that plans for the
participation, if any, of the United States in European economic reconstruction
would be formulated and announced by the Department of State to be carried out
by appropriate civilian agencies after the military period. Under these
instructions and concepts, our military civil affairs agencies have confined
themselves to the relatively restricted field of relief and rehabilitation and,
in the absence of any definition of national policy of economic
reconstruction, have obviously been unable to point their activities toward any
such program.

It has occurred to me that it would be helpful if the Department of State
would advise the War Department of whatever long-range plans it may have
formulated for United States participation in European economic reconstruction
so that arrangements can he made for the coordination of the limited activities
under Army jurisdiction with any larger program which may be contemplated.
The area of immediate concern is, of course, Italy.

Questions of policy pertaining to rehabilitation and reconstruction which
were the subject of inquiry in your letter of 5 June 1944 have been under
consideration in the Department for many months. It has been recognized that the
responsibility of the Army would be a limited one and confined largely to
rehabilitation of those industries and public works which will be necessary for
the further prosecution of the war or which will result in production of
supplies which otherwise would have to be imported and which perhaps would
prevent suffering and unrest among the civilian population. Perhaps some further
work of rehabilitation, again in very limited amount, will be carried forward by
the United Nations Relief and Rehabilitation Administration. It is expected
that at the next council meeting there will be discussed the question of its
activities in ex-enemy areas. In any event, much more will need to be done by
other civil affairs agencies in order to restore the productive capacity of the
liberated areas.

The Department, together with other agencies of this Government, has been
actively engaged in planning for rehabilitation and reconstruction. A memorandum
prepared in the Department on reconstruction financing and related problems has
been approved by the President and steps are now being taken toward the
implementation of the recommendations which were made. The policy as outlined is
that this Government will engage in a properly considered program of foreign
investment to aid in the financing of reconstruction in war-torn areas,
including facilitating the export of capital goods for such purposes. ♦ ♦ ♦

THE POLITICAL ADVISER AND AC BOTH NOTE UNREASONABLE USE OF MILITARY
PRIORITIES
[Paraphrase of Msg, Alexander Kirk, U.S. Political Adviser, to State Dept,
17 Aug 44, CAD files, 400.38 (2-2043), sec. 9]

To improve conditions in liberated Italy we must have the transportation
facilities to get a more just distribution of supplies . . . and better
production from the view of industrial establishment available, most of these
having been seized by the military. So-called military considerations should not
be translated as solely consideration of the military. . . . We are talking
about only relieving conditions by better distribution and use of what is here
and have no reference to wiping out the black market or eventual rehabilitation
which only foreign imports can bring about.

4. The paramount priority of the military over the civilian economy and the
lack of effective power of pressure on the civilian side have depressed the
civilian economy not only where there has been a clear-cut choice between
military and civilian needs, but also in many cases where a slight military
inconvenience would have meant a large civilian gain. A good example of the
former is the case of phosphate rock. After months of hard work in preparing
the fertilizer industry to resume production, phosphate rock was not shipped
from North Africa for treatment in Italy. Example of the latter is the case of a
rope factory (Corderia Napoletana) which was completely ready for production but
which was used instead as a QM storehouse, while other buildings were available
as storehouses. The lack of power of ACC to effect changes in cases of the
latter type is well illustrated by the fact that the Army Air Forces
successfully took over a Rome hotel which had been previously allocated for ACC
headquarters officers' billets. ♦ ♦ ♦

2. Italy does have an extensive social insurance system including provision
for sickness, invalidity, marriage, maternity, old-age, death and tuberculosis
insurance, unemployment insurance, and relief, and workmen's compensation. The
benefits paid under the system are, however, completely inadequate. The basic
benefit for unemployment insurance, for example, varies from 2.5 to 7 lire daily
for manual workers, and from 4 to 12 lire daily for non-manual workers.

5. With reference to paragraph 3(a) of my letter of 16 Aug. 44, it is my
thought that, in view of the woeful inadequacy of the benefits under the present
system of social insurance, the Government should prepare a program of relief
which would provide adequate food, clothing and housing to every person in need. ♦ ♦ ♦

2. a. In your letter of 16 August 1944 you pointed out (and I agree that your
statements are sound) that persons in the lower income brackets are unable to sustain themselves because of the inadequate supplies
of food, that the available housing is inadequate and that the stock of clothing
will he inadequate to meet the rigours of Winter. It does not appear to me that
any reasonable amount of tampering with the present schedule of relief payments
can relieve these inadequacies. I should think that it was elemental that an
increase in monetary payments with no increase in the quantity of food, housing
and clothing available will simply increase prices without in any way
ameliorating the condition of recipients of relief. ♦ ♦ ♦

♦ ♦ ♦ We have been concerned around here, both the British and the Americans,
for some time about the inability or the indisposition of ACC and AMG,
particularly ACC, to undertake in a serious, forthright, and effective manner,
the institution of a systematic rehabilitation program in Italy.

We have no fault to find particularly with the relief side of the program. .
. . What we refer to are those measures and the importation of those means which
will reduce the importation of food, drugs, coal, clothing, etc.

I have talked to ... dozens of ... people who have come out of the North
African Theater in the last few months, and they all tell me the same story.
They say that we in Washington and the British in London and you in Algiers have
a complete comprehension of the necessity for a program of systematic
rehabilitation, but that the idea either is not understood or is not accepted
in ACC. Our authority to carry through our relief obligations in the next year
in Europe is in jeopardy at the moment because of the disinclination or the
inability of ACC, . . . to get into the business of making Italy self
sustaining, and to get into this business with vigor and efficacy. .. .

... While I understand your position, and appreciate well the serious nature
of the problem, my investigations and talks at ACC have convinced me that the
record is not as bad as you have been led to believe.

[367]

... I propose in this letter to try to give you the picture as I see it, and
to indicate some of the ideas and plans that are being developed for the future.

I.

a. Scope of the Task. It is important that the task of rehabilitation in
Italy be viewed in proper perspective. This task is not a small one or one that
can be accomplished in a short time. It is necessary to live in Italy to
appreciate the extent to which the country's power to produce has been
destroyed, its economy disorganized and its people demoralized. Over 40 million people have been supported in the
relatively small area of Italy in the past by means of a highly intensive system
of production that required many years and large amounts of capital to build. To
rebuild it after this war, many years and large amounts of capital will again be
required. This is the task of a generation and not in our life-time will it be
completed. A few Allied officers, working in the most difficult conditions, over
the course of a few months or a year can only scratch the surface of the
problem.

b. Degree of Destruction. The extent of the destruction suffered by Italian
industry cannot be over-estimated. The destruction by Allied bombing was
considerable, but it is the demolitions of the retreating Germans that have
been most effective because of the thorough and scientific manner in which they
have been carried out. . . . With its power to produce extensively destroyed, it
will be difficult for Italy to meet its minimum needs at home and buy the foods
and other goods it must obtain from abroad. .. .

c. The Scarcity of Transport. Some of the difficulties that have affected
the problem of rehabilitation may also be mentioned. Chief among these has been
the scarcity of transport. The armies, as a general practice, pressed into
service practically all of the country's automotive transport, and carried it
forward with them as they advanced; the railroads have been almost wholly
destroyed and to the extent that they have been put back into operation by the
Army they haul for the most part military supplies; few coastal vessels can
operate because of restrictions on the use of ports and the shortage of fuel. As
a result it has generally been with the utmost difficulty that parts could be
moved to a factory to repair it, or that raw materials could be gotten to it or
the finished product gotten away. .. .

d. Taking of Supplies by the Armies. The difficult logistical problems
involved in the operation through Italy have forced the armies to resort to a
maximum of local exploitation. Supplies of every description have been requisitioned by the military to fill
the needs of the moment. Faced with immediate requirements, the armies could not
plan the most economic use of such supplies, and little consideration could be
given to the difficulties created by the seizure of stocks which had been
gathered for civil purposes. The same logistical considerations which prompted
such seizure by the Armies apply with even greater force to the program of
replacement of these civil supplies....

e. Taking of Productive Facilities by the Armies. Perhaps more serious in
its effect on Italian industry, has been the requisitioning of plants and
warehouses and the taking of machinery by the armies. Such large industrial
buildings as are found relatively intact are useful as billets, bakeries, etc.
and as warehouses for military stores. Where plants have been used for these
purposes, delicate equipment has almost inevitably been damaged by the troops
occupying the premises. Machinery and electrical gear required by one or the
other of the services have been removed. Military expediency does not permit of
consideration of the long-term benefits of selective requisitioning, and thus
industrial plants are frequently immobilized by the removal of a few vital
machines for army uses. Losses of this kind, difficult to replace promptly even
in normal times, are for the most part irreplaceable under existing conditions.
These are problems in which, by reason of the necessary priority granted to
tactical troops, the ACC up to the present has had little power to interfere,
but which have obviously retarded its efforts toward essential rehabilitation. ♦ ♦ ♦

II....

a. . . . A large part of the time up to the present has been consumed,
necessarily, in studying different industries, Visiting various factories, and
preparing programs of rehabilitation. In all, more than a thousand different
plants have been surveyed by the Industry Subcommission and reports have been
submitted covering several hundred. To the first of August approximately
1,342,000 tons of shipping had been saved by products which have been obtained
for use by the Allies in Italy. While a substantial part of this total has been
procured by the services themselves, a not inconsiderable share results from
the work of the ACC.

III. g. . . . The need for a comprehensive directive on rehabilitation is
being felt increasingly at both AFHQ and the ACC. Such a directive should state
in clear terms what Allied policy on Italian economic rehabilitation is, for as
you will

[368]

appreciate, it is difficult for us and the ACC to carry out to the
satisfaction of Washington and London a policy which has never to our knowledge
been clearly expressed. A comprehensive directive would deal inter alia with the
following points: how many and what industries should be rehabilitated; to what
points should rehabilitation of these industries be carried; what is the terms
of the program we are expected to develop; what are its objectives; is Italy to
be made self sustaining (to use the words of your letter), or are the more
liberal economic principles identified with our recent State Department policy
to be followed; by what standards can we measure our success or failure in
rehabilitating individual industries and the Italian economy as a whole? We
would be glad to co-operate with you in the preparation of such a directive. ♦ ♦ ♦

1. As the operational stage in large parts of occupied territory is ended,
and as battle line in Italy moves north, I believe it necessary that there be a
re-examination of problems of civilian supply and economic rehabilitation. In
the forward areas purely military "actors continue to be predominant, but
problems connected with civil administration, especially of an economic nature,
raise general problems on which I require guidance in my position as President
of the Allied Control Commission. ♦ ♦ ♦

3. The limited directives which have prevailed appear no longer to be
adequate in the light of the altered operational conditions. The Armistice
agreement which governs the Allied Control Commission's operations includes no
commitment to the people of Italy as to any measure of economic aid. But, presumably because of the known humanitarian policies of
the two governments, there has arisen the expectation if not the assumption
among Italians that there would be forthcoming an additional measure of relief
and assistance. In both countries public utterances have tended to encourage
this view. Furthermore, if at this stage the two Governments continue to
consider only what is essential to the interests of the war effort, they may
lose the opportunity of ensuring the creation of a reasonably prosperous and
contented postwar Italy, which is one of their long-term interests. Despite this
fact the criterion of military necessity governs and is being strictly adhered
to in the provision of supply. . . . An example which is not of much importance
in itself but which indicates the kind of question now arising-in answer to a
requisition of paper necessary for proper keeping of the records of Italian
taxes, it is asked (CAL 566) if the paper is essential to the control and
management of the civil population.

4. For the above reasons I ask that the directives which determine the
furnishing of civilian supply and economic rehabilitation [Chapter V] be
reconsidered, and that, if it is the policy of the governments to assist Italy
beyond the degree required by strict military necessity of the Allied troops,
there be a revision of the standards applicable to that assistance. I request
especially that I be informed:

(a) to what degree, if any, it is desired that there be carried out
industrial rehabilitation in Italy and what industries should be given priority
if any rehabilitation is desired.
(b) to what degree, if any, I may take inflationary factors into account,
and to what extent I am responsible for measures to counter the tendencies
toward inflation.
(c) within the limits of available shipping, to what degree, if any, should
experts be stimulated and machinery to handle export trade be created. ♦ ♦ ♦